Month: March 2017

Copy of your KYC

You can check your KYC status on the CAMSwebsite by entering your PAN Number

But it only offers your KYC status, not a copy of your KYC.

If you have doubts about what the other person has filled in your KYC, download a KYC form from the site and update the information by filling all the relevant details. Here is the link: https://camskra.com/

With election results the markets have been bouyant and it reflects that the faith in policy reforms. We believe that this will support investment sentiment going forward. There could be some volatility due to global factors but India remains strong on macroeconomic front. We believe that strong government could attract foreign investment to India. With the implementation of goods and services tax (GST), will support long-term structural reforms as aimed by the government. With the government’s focus on the policy front would assist the unorganised economy move into organised and mainstream economy, thus boosting growth. Investors should look beyond near term concerns, as situation will return to normal and the economy will start moving smoothly again.

The economy has reached the inflection point and is expected to grow over next 3 to 5 years and this strengthens our conviction in launching ICICI Prudential Value Fund – Series 12, a ~3.5 year close ended equity fund that aims to provide long-term capital appreciation by taking exposure in those stocks/sectors that are more levered to the economy and are likely to grow at a faster pace.

ICICI Prudential Value Fund – Series 12

The Scheme is a ~3.5 year close ended equity scheme that aims to provide long-term capital appreciation by taking exposure in those stocks/sectors that are more levered to the economy and are likely to grow at a faster pace. The Scheme aims to:

The fund can invest across market capitalisation.

The fund will be choosing stocks bottom up.

The fund will invest in sectors that are likely to get benefited from India’s economic recovery and expected to do well in the next 3 years. Sectors which can be benefited are

• Shift from Unorganised to Organised Sectors

• Infrastructure Sector

Declare commensurate dividends*.

*Dividends will be declared subject to availability of distributable surplus and approval from Trustees.

Very often financial planners meet someone who intending to invest in stocks, bonds, real estate, mutual funds, gold etc.Such a statement clearly reflects that a large number of investors think that like stocks, bonds, gold and real estate, mutual funds are also an asset class which should be there in their portfolio.

MFs are Bridge to asset classes

The reality, however, is that a mutual fund itself is not an asset class. Rather it’s a bridge to investing in various asset classes like stocks, bonds, gold, real estate etc. at a cost and risk which are usually lower than when an investor invests in these assets on his own.

This is possible because say if an investor invests in an equity mutual fund, he is actually, although indirectly, investing in stocks. This is since the equity scheme in which he is investing has a portfolio of stocks which is managed by a group of individuals who have experience in investing and managing money. Investors in debt, gold, real estate and commodities could also expect the same. In India, though, real estate and commodity mutual funds are yet to be launched.

Low risk, low cost

Since mutual fund schemes are managed by a group of experienced investment professionals, the chances of them losing money compared to one who does not have much experience in investing in stocks, debt etc. are lower.In addition market regulator Sebi has also put in a cap on the total expense fee that fund houses can charge their investors in each scheme (maximum of 2.75% per annum).

Better tax efficiency

Mutual funds also offer better tax efficiency when compared with direct investing. One of the reasons for this is the government’s intentions to push retail investors to take the mutual fund route to investing.

When planning ones finances there is a requirement to invest in various asset classes. In such a situation mutual funds turn out to be one of the best options to invest and achieve ones financial goals. Mutual funds are basically a means to invest in any asset class with several advantages to the investors.

Mutual funds can be best explained if one compares it to a garden. In a garden there are many flowers and they are taken care by the gardener. In a similar way a mutual fund has many securities which are managed by a fund manager. This fund manager is concerned with generating returns for his investors and does not get married to a stock security. This is a behavioural hitch while one looks at investing directly. He (fund manager) cuts all weeds (non-performing securities) and retains only the performing ones.

One of the clear advantages of investing in mutual funds is diversification which leads to reducing the risks associated with investing.

The common myth about mutual funds is that they invest only in equities. It is rather a tool which provides a pathway to invest in debt market, gold and even real estates. One of the biggest boons of a mutual fund is systematic investment which allows an investor to invest at regular intervals. This helps in rupee cost averaging which in turn helps investors get better risk-adjusted returns.

All in all mutual funds turn out to be one of the best products for an investors to help him achieve financial freedom. It is however important that product selection should be based on proper research and after understanding ones financial goals and risk taking ability.

The best strategy which you can adopt is investing in a balanced mutual fund, which invests minimum of 65% in equity and remaining 35% in debt. With SWP (Systematic Withdrawal Plan) strategy, you can withdraw a monthly amount

SIP is just a facility to invest in MFs wherein a monthly fixed amount is invested on any particular date every month. Alternatively, you can invest lump sum any amount, any time.

Secondly, you need to identify for what goal and for how long are you willing to stay invested. MFs offer various schemes

SIPs are by far the best way to invest in stocks and equity funds. Though SIPs in equity funds have seen a robust increase, the simple logic is lost on ELSS investors. AMFI data shows that nearly 50% of the total inflows into the ELSS category happen in the last three months of the financial year. The month of March alone accounts for 22-25% of the total inflows. Instead of taking the safer and more convenient SIP route, taxpayers get caught up in the year-end rush and invest a lump sum in risky assets.

BASING YOUR CHOICE ON SHORT-TERM PERFORMANCE

The other big mistake is to look at the short term performance of the funds and go with the best performer. ELSS funds are equity schemes, and the stability of the returns is more important than the quantum of gain. Look at the 3-year and 5-year performance of the scheme before you make a choice. We have identified the best ELSS schemes based on the Value Research star ratings, which take into account several parameters, including the stability of returns and long-term risk-adjusted performance.

CHOOSING THE WRONG OPTION

Dividends from mutual funds are just another way of booking profits. The dividend you receive gets deducted from the NAV, so you don’t really gain anything. If you have invested in ELSS funds for the long term, don’t go for the dividend option. The dividend reinvestment option is even worse. Every time the fund gives out a dividend and reinvests the money into your account, the three-year lock in period starts all over again. In effect, you are locked in for perpetuity.

IGNORING SMALLER FUNDS

With an annualised return of 13.84%, the Invesco India Tax Plan is the best performing ELSS fund in the past 10 years. But very few investors have gained from it, because its AUM is only `320 crore. The terrific returns generated by this tiny fund has led us to include this scheme in our list of top ELSS funds. So, don’t base your choice on size but go by the performance.

REDEEMING AFTER LOCK-IN

Don’t treat your ELSS funds as a short-term investment. There is a difference between lock-in and maturity. NSCs and tax-saving fixed deposits mature in five years and therefore the money comes back to you after five years. ELSS funds have a three-year lock in period, but this doesn’t mean you should redeem the investment after three years. Look at ELSS funds as regular equity funds that should be held for the long term.

Equity-linked saving schemes (ELSS) are the best way to save tax in 2017. The Economic Times assessed 10 tax-saving options on eight key parameters, including returns, safety , liquidity , costs, transparency , flexibility, ease of investment and taxability of income. ELSS funds scored highest, followed by the National Pension System (NPS) and Ulips at the second and third place, respectively .

The terrific returns generated by ELSS (CAGR of 18.7% in past three years and 17.46% in past five years) are not the only plus point of these funds. Their costs are very low (2.52.75% a year) and all charges, portfolios and transactions are in the public domain. Returns are tax free because long-term capital gains from equity funds are exempt and they have the shortest lock-in period of three years.

Investing in ELSS funds has now become very easy with the launch of the e-KYC facility. The whole process does not take more than 30-35 minutes. The Pension Fund Regulatory and Development Authority has made NPS investing completely paperless. Ulips can also be bought online with ease.

NPS, at the second place in the annual ranking, is a great way to save tax if you don’t mind locking up your money till you retire. Till last year, the taxability of the NPS was a big issue. But last year’s Budget changed the rules and made 40% of the corpus tax-free. The PFRDA wants that the balance 60% should also be exempt from tax. NPS is especially useful for investors who may have exhausted the `1.5-lakh investment limit under Sec 80C but want to save more. They can save more tax by investing `50,000 in NPS under Section 80CCD(1b).

Many readers may be shocked to see Ulips at number three. But the new online Ulips have very low costs, which leaves a lot on the table for the buyer. Aggressive Ulip plans have earned almost 12% annualised returns in the past five years. However, these numbers only indicate the rise in the NAV .Some Ulip charges are levied by cancelling units so the actual returns for investors may be lower.Even so, the income from these plans is tax-free under Sec 10(10d) and investors can switch from one fund to another without incurring a tax liability.

Provident Fund (PF) can also be a great way to save tax. Though an individual’s contribution to the PF is linked to the salary , one can increase the amount by opting for the Voluntary Provident Fund (VPF). Contributions to VPF are eligible for the same tax benefits as the PF. But as this option is not available at this point of the year, the Public Provident Fund (PPF) can be a suitable alternative. The interest rate is lower at 8%, but remains ahead of inflation. It is also higher than bank deposits and corporate FDs.

For many investors, ease of investment becomes paramount because they don’t have much time. Fixed deposits score very high on this front. Just a few clicks and your investment is done. Insurance agents also make the process very easy . They volunteer to do all the paperwork and the investor has to just sign on the dotted line. But the cost of this ease is very high. In the 30% tax bracket, the post-tax returns from fixed deposits are less than 5%. And insurance plans not only offer low returns of 5-6% but also force the buyer to continue investing for years. This is why these instruments figure lower down in our ranking.

A word of advice. Don’t go by the ranking alone. Some investment options may not be suitable for certain individuals.For instance, even though ELSS funds can offer terrific returns, senior citizens above 70 should steer clear of these schemes. They are better off investing in the Senior Citizens’ Saving Scheme, the PPF or tax-saving fixed deposits.

For investors in actively managed equity mutual funds, the worth of a fund lies in how much return it is able to generate over that given by the relevant benchmark. So, at a basic level, the choice of fund will have to be driven by how much value a fund manager is adding vis-a-vis an index.

Alpha, which measures this value addition, is often taken as a metric to gauge fund performance. Investors who seek outperformance would be drawn towards funds running a higher alpha. But can investors always benefit from the pursuit of high alpha?

IMPORTANCE OF ALPHA

Simply told, alpha is the excess return delivered by a fund over its benchmark index. But more precisely , it is the excess return or value generated by a fund manager over the fund’s expected return. This expected performance is based on the risk taken by the fund manager relative to the market, which is defined by beta.

Thus, a fund’s alpha is derived from its underlying beta. A beta value of 1.5 indicates the fund would deliver 1.5% return for every 1% gain in the value of its underlying index.

Suppose a fund with a beta of 1.5 delivers a return of 18% over a certain period while its underlying benchmark index posts 12% returns. Given the beta, the fund manager would be expected to deliver a return of 18% (12%*1. 5). So, in this case, the fund manager has actually failed to generate alpha even though the fund has delivered 6% excess return over its benchmark.

If the fund delivered a return of 20% for the same underlying risk, the alpha generated would be 2%. Which implies that alpha represents the fund manager’s expertise in stock selection or portfolio building. Most top-performing funds over longer time periods boast of a high alpha. In most cases, if a fund has generated high alpha in the past, it is likely to generate the same in the future too. Thus, it would bode well for investors to pay attention to a fund’s alpha when selecting equity funds.

However, experts insist that consistency in delivering alpha is critical. Certain funds are good at delivering alpha only during a market uptrend.The fund should show consistency in generating alpha across various time frames and market cycles. Alpha can be a good indicator of a fund manager’s ability provided there is consistency in the philosophy and processes driving the portfolio selection. Also, bear in mind that extent of alpha varies between fund categories. Typically, mid-cap oriented equity funds are able to deliver higher alpha than large-cap oriented ones. While mid-cap funds can comfortably clock alpha in excess of 8-10%, alpha in large-cap funds is typically lower.

WHERE ALPHA MAY NOT WORK

Alpha as a metric has a few shortcomings, which can make its extensive use counter-productive. First, alpha depends on the underlying benchmark index for the fund. Even though we may measure it in absolute terms, alpha is actually a relative measure dependent on market proxy . This can have several implications.

It can prevent effective comparison between funds, even within the same fund category . Since different equity funds within the same category also tend to be bench marked against different indices, the alpha statistic will measure out performance relative to that benchmark. You can end up comparing apples to oranges.

Besides, since it measures performance relative to beta, the accuracy of alpha depends on the credibility of the beta measure. The beta value of a fund may be flawed if its correlation to the underlying index is very low. So, a fund’s alpha may be misleading if it does not have high correlation to the benchmark it is being compared with.

Another gripe analysts have with using alpha is that it is ignorant of the risk-adjusted performance. While it measures excess return given the level of market risk, it makes no adjustment for the risk involved in delivering that additional performance. As such, experts insist that alpha should not be used in isolation while picking funds.It should be supplemented with other metrics to really gain true understanding of the performance of the fund. Investors give equal importance to the underlying risk. Go with a fund offering healthy alpha but lower beta.

Birla Sun Life Pure Value, for example, has delivered a healthy alpha of 10% over the past five years with a beta of 1.06. Its peer in the same category , BNP Paribas Midcap Fund has delivered similar return although at a lower beta of 0.83. Belapurkar says just looking at alpha does not provide the entire picture. Investors need to dissect the number further to see where the alpha is actually coming from. If it is due to a high risk taken by the fund manager, then it could be a red flag. Investors need to consider other risk factors apart from beta.

For instance, a large-cap fund taking high exposure to mid or smallcap stocks would likely fetch a high alpha but that doesn’t reflect the fund manager’s acumen. Finally, investors should understand that past performance is not and never should be relied on as indicator of future performance.

In case of unlisted mutual funds, TDS is applicable for NRIs at the rate of 10% without indexation benefit. Birla Sunlife Income Plus is a debt fund, which means that if you redeem it after 3 years, long-term capital gains tax at the rate of 20% (with indexation benefit) will apply.

Therefore, you will still need to pay the balance tax after deducting the TDS which you have already paid.

All open-end funds are unlisted as they do not trade on an exchange. Closed-end funds and ETFs are usually listed and can be traded on a stock exchange.

Select the right scheme after giving due consideration to all factors like risks, investment time horizon, suitability to your needs Be clear about growth or dividend in a fund after consulting with your financial advisor.

Consider fund’s expenses because higher the expenses, lower is your post-expense return Always consider post tax profits because finally it’s the return after tax that counts Diversify into various kinds of mutual funds to lower the risks since not all assets like stocks, bonds, gold etc would rally at the same time Consider a fund house’s experience in managing money and giving good returns over the long term Review your investments at regular intervals and rebalance if you think that the returns are not as planned when you started investing

Mutual Fund Investing Don’ts

Avoid being too greedy about returns It’s not a very good idea to concentrate on short term returns. Remember most investments are to meet your long term investing goals Avoid looking at portfolio performance too frequently. In case of short term volatility and sub-par performance, frequent check at returns could make you feel jittery

Tools and tables

For an idea about the probable returns, you can use the mutual fund returns calculators available on various websites To estimate your future corpus size, use SIP (systematic investment plan) calculators available on various websites If you know how much money you need after say X number of years and have an idea of expected returns, use calculators available on the web to estimate how much you need to invest monthly to get to your target amount.